Are you curious what incorporation could mean for your business, or have you always wondered what that “Inc.” means in the title of your favorite company? Maybe you are considering incorporating a business, and you’d like to get more sense of what is involved.
If you have heard that incorporating your business will change the entity permanently, you are correct. But is incorporation the right choice for your company now?
Brad Nakase, Attorney
1) Significance of Incorporating a Business
Wondering how incorporation will change your business? If you decide to incorporate, there will be many legal actions to take care of. First, you will need to file documents and fill out the appropriate paperwork to file in California. There are also a few other things to consider initially.
Creating an Inc. will change how you report taxes and may benefit your bottom line. There will also be legal consequences regarding how your entity is conducted; for example, you may not treat the company’s money as your personal money. You’ll need to make sure that the state of California recognizes your new Inc., and you will do that through the documents that you file.
When you incorporate, you will also be able to add multiple shareholders or stick to one single shareholder. This is because an incorporated entity is distinct from company shareholders and recognized as such.
2) Incorporating a Business: The Concept of Continuity
Once your business is incorporated, it can “live forever.” This means that your corporation could exist for many decades, even after the business owners are long gone.
It does not matter who the business owners may be; the company will continue to be recognized as viable regardless of how much time has passed.
Once a business is incorporated, it can exist as a unique legal entity and transfer its interest of ownership. This is an important factor to be aware of when thinking of incorporating that small business you are so proud of or incorporating the larger entity that needs more room to grow.
3) Raising Capital
When you incorporate a business, the company enjoys greater ease in raising capital. How? You increase your issuances of company stock. This capability to ‘raise stock’ is something that you unincorporated businesses cannot do, and it can pay off immediately.
Incorporation also can make it easy for businesses to increase capital in an alternate way: you may find that you are able to issue an additional stock class.
What can you do with this new cash flow after you incorporate a business? You undoubtedly have new costs and obligations, not to mention filing fees to go along with your resized business. The earned capital from these stocks will help with these increased costs. If you are all caught up, why not use the capital to further expand your business or offer employees stock options and incentives? For more information, go to the Securities Exchange Commission’s website on raising capital.
4) How Incorporating a Business Protects You
When you incorporate your business, your shareholders will instantly be protected from any liabilities or obligations, and this will be in the form of limited liability. Personal asset protection is the main reason many business owners choose to incorporate their companies.
This extra insurance protects owners. Creditors cannot legally pursue personal finances and assets, even if they are seeking to recover the debts of the owners’ business.
Therefore, it will be easier for your business to entice and maintain investors than ever before.
5) The Formalities of Incorporating
Once you make the important decision to incorporate, your corporation will encounter many new regulations. You will also have to deal with various formalities that you did not have to deal with before.
There will be new paperwork to fill out, and you will need to register with the correct state officials. Different states have different laws, rules, and regulations. Also, there will be fees involved, so make a note of that as well.
In Order to Incorporate:
- Keep track of banking information
- Keep track of company minutes
- File tax reports annually
- File tax returns annually
6) The Tax Process for an Incorporated Business
Another important point: an incorporated business may need to pay taxes on corporate profits twice. This is known as double-taxation.
Why does this occur? You will be paying taxes as a private corporation but also be paying the IRS as individuals. So, you will pay taxes on your business’ corporate profits on a personal level, too.
Thinking of selling assets after you incorporate? You may need to pay double the taxes on these, too. Some of these tax issues can get complex, especially if you are new to incorporating them. For more questions about paying taxes as a corporation, talk to a corporate attorney.
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If it is time to incorporate your business, it is a good idea to speak with a skilled attorney. Please let us know if you would like some help as you take your business to the next level. At Nakase Wade, our corporate lawyers & business attorneys are here to help you with this important step.